Potential Lebanon ceasefire lifts Iran deal hopes

European markets are in the green, coming in the wake of a UK data dump that saw a welcome surge for UK growth. The February GDP metric posting a bumper 0.5% bounce-back, smashing expectations and signalling a broad-based resilience across services and construction. Nonetheless, the IMF report seen earlier in the week highlights the perception that this pre-war growth trajectory is likely to be a temporary one, with the UK projected to suffer disproportionately due to the US-Israeli war with Iran. Thus, while the release of improved GDP, industrial production and construction output data provides a reminder of the direction of travel pre-war, things are likely to take a turn owing to the vulnerability of the UK to economy to the impending energy shock.

The hopes around a potential breakthrough in US-Iran talks has helped drive S&P 500, Nasdaq, and Nikkei 225 into fresh record highs. The notion that valuations should be higher than the beginning of this crisis despite the huge disruptions and risks seems somewhat unbelievable, however this is certainly a very uneven rally indeed. A look into the specific sectors of the S&P 500 highlights why the Nasdaq has done particularly well, with the information technology segment trading some 8% higher compared with the levels seen before the breakout of the war. Thus, while the notion of record highs might signal a return to normality, that strength is simply a story of tech and energy sector strength, with many of the sector aligned with the real economy still significantly lower as investors weigh up the potential consequences of this conflict. 

The continued success seen within the US stock markets will undoubtedly come down to the ability to strike a deal and ultimately draw a line under the conflict in Iran. With Israel and Lebanon moving towards a ceasefire, this would clearly facilitate a easier runway towards some form of deal that ends the wider crisis. While the ceasefire runs out on Wednesday, there is a perception that we will see the two sides meet again in a bid to thrash out some form of deal that focuses on Iran’s nuclear ambitions. However, with each day that passes, we see another 10 million barrels per day of crude removed from the global market. And while there are slight cracks appearing in supply levels around the world, Europe in particular has always seen mid-April as the time when those shortages really start to bite. Thus while markets are glad that things are moving in the right direction, a solution needs to be found sooner rather than later given the amount of time it will take to normalise the flow of commodities through the Strait.